The markets could crumble under the weight of a series of rate hikes and nagging inflation well before the year ends, warns a top strategist.
"I do expect a market correction later on this year related to numbers [earnings]," said 22V Research founder Dennis DeBusschere on Yahoo Finance Live. "For now this is something not fully internalized by investors."
DeBusschere expects "violently flat" returns for markets.
To Debusschere's point, markets have largely ignored any risk to corporate profits from inflation and higher rates.
The S&P 500 closed as low as 4,170.70 this year on March 8 as traders fretted about the aftershock of Russian's war on Ukraine, which included surging oil prices. But markets have since rallied hard — the S&P 500 is up 8% since those March 8 lows.
Stocks across sectors have rebounded, notably top tech names such as Meta (+15% in the past month) and Amazon (+12%).
Seasonal forces have also emboldened investors.
The S&P 500 has been green in April in 15 of the past 16 years, with an average return of 3.1% (the high was a 12.7% return in April 2020, and the low was a -0.7% dip in April 2012) according to data from LPL Financial's Ryan Detrick.
But, inflationary risks to corporate profits remain front and center and could begin to chip away at the bullish narrative in markets come earnings season later this month.
The Consumer Price Index (CPI) rose by 7.9% in February, marking the fastest pace of annual inflation in 40 years amid a push higher in rent, food and used car prices. Meanwhile, the Personal Consumption Expenditures index (PCE) rose 6.4% in February, accelerating from a 6.1% increase in January.
It represented the fastest rate of inflation since 1982.
The number of S&P 500 companies citing "inflation" on earnings calls has hit its highest level in 10 years, says FactSet.
As prices have climbed throughout the economy, the Federal Reserve has begun to hike interest rates to cool things down. The pace of rate hikes may be quicker than most market participants expect, as seen in the harsh reaction to stock prices Tuesday amid hawkish commentary from influential Fed Governor Lael Brainard.
“Currently, inflation is much too high and is subject to upside risks,” Brainard said at a conference Tuesday. “The Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.”
Legendary investor and Bridgewater founder Ray Dalio warns the Federal Reserve is in a very tough spot, making the outlook for the markets uncertain.
"So what you have is an enough tightening by the Federal Reserve to deal with inflation adequately, and that is too much tightening for the markets and the economy. So the Fed is going to be in a very difficult place a year from now as inflation still remains high and it starts to pinch on both the markets and the economy," said Dalio in an interview with Yahoo Finance Presents.
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit